Miguel Carcamo
Miguel Carcamo
Miguel Carcamo
Miguel Carcamo
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Miguel Carcamo
Rules to Consider When Rolling Over a Retirement Account

Rules to Consider When Rolling Over a Retirement Account

Saving for retirement is an essential part of financial planning that can provide tremendous benefits, especially if done correctly. There are a multitude of different accounts and plans, each with their own benefits, costs, and rules which must be taken into consideration. At some point, you may find yourself transferring funds  from one retirement account to another. Listed below are things to consider when moving funds so that you are  able to get the most out of your retirement.

The first item to consider is which method you will utilize to roll over your retirement account. The methods are as follows:

  • Direct rollovers
  • Trustee-to-trustee transfers
  • 60-day rollovers or Indirect rollovers

A direct rollover is a distribution from a retirement plan that goes directly to another plan or account. The trustee-to-trustee transfer is similar except for the distribution is coming from an IRA instead. For direct rollovers and trustee-to-trustee transfers, there is no limit to how many can be done in a year, and it should not create taxable income. Once you’ve initiated one of these rollovers, much of the work will be done for you by your plan administrator or financial institution responsible for the account. This applies for IRA-to-IRA and Roth-to-Roth rollovers. If you are going from a traditional IRA to a Roth, this is called a conversion and will be covered later.

A 60-day, or indirect rollover, is a distribution where you receive a check from the plan administrator or institution responsible for your account. For the 60-day rollover, there are additional rules that you must be aware of. First, you have 60 days from when you have received the distribution from your retirement account to deposit the funds into your new account. This includes the amount that was withheld by your plan administrator or financial institution. IRA accounts have 10% withheld whereas retirement plans have 20% withheld. These funds must come from additional sources of income.   For example, if your retirement plan has a balance of $10,000, you will only receive an $8,000 dollar check from your plan administrator. However, you will need to deposit all $10,000 into your new retirement account even though you only received $8,000 to not incur any penalties. If this is not done, whatever amount that has not been deposited will be considered taxable income and may be subject to an additional 10% tax for early distributions. One way to get around this is to rollover your distribution into a Roth IRA. It is possible to deposit the funds into a retirement account after the 60-day period, however you will need to apply for an automatic waiver, request a private letter ruling, or self-certify that you qualify for a waiver. If you are over the age of 59 ½, you do not need to worry about the penalties from early distributions, however the income may still be taxed.

The second rule to note is that only one distribution may have a 60-day rollover in a 12-month period. For example, if you received a distribution on January 1st of a given year and received another distribution in December of the same year, you may not do another 60-day rollover even if you delay rolling over the distribution in late January or early February. This is due to receiving the distribution within the same year you had already rolled a previous distribution. To do another indirect rollover, you would have to receive the distribution after January 1st of the next year. Failure to follow this rule will result in additional taxes, penalties, and may even disqualify your retirement plan. If the above rules are followed, no taxable income will be created much like the direct and trustee-to-trustee rollovers.

The next item to consider if whether you are rolling your current retirement account into a similar one or converting it from a traditional retirement account to a Roth IRA. Conversions follow the same rules discussed above; however, they have additional nuances that must be considered. A traditional plan or IRA has pre-tax contributions whereas the Roth IRA is after-tax. When converting your account, you will have to pay taxes on the distribution before it can be deposited to the new account. Another factor to consider is that Roth IRA accounts also have lower contribution limits compared to traditional IRA accounts. Much like the once-per-year 60-day rollover rule, failure to observe this limit will result in tax penalties.

If you need guidance in determining which retirement plans or course of action you should take regarding your retirement accounts, the tax professionals at ADKF can help steer you in the right direction to ensure your future is secure and taken care of. Please reach out to us and we will be happy to take care of you.


ADKF
is the largest, locally owned public accounting firm in San Antonio, Texas, with branch offices in Boerne and New Braunfels. We have been serving our community since 1991. We are a full-service CPA firm dedicated to providing a broad range of tax, audit, bookkeeping, tax controversy, and consulting services with superior customer service to help our clients meet their goals and objectives. Please click here to set an appointment with us.

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